December 9, 2016

For the first time, the Office of Comptroller of Currency (OCC) will allow financial technology (Fintech) companies to apply for national bank charters. The OCC has invited public comment on the concept with a deadline for submitting comments of January 15, 2017.

The proposal focuses on issues, requirements, and the OCC's regulatory expectations attendant to its acceptance and consideration of applications from Fintech companies for a full commercial bank charter or a special purpose national bank charter. The OCC has the authority to grant special purpose national bank charters to Fintech firms that provide fiduciary services or conduct at least one of three core banking activities—receiving deposits, paying checks, or lending money. The proposal does not propose bright-line rules for approval but rather defers to the OCC's current approach of approving or denying applications for a charter on a case-by-case basis.

In announcing the OCC's plans, Comptroller Thomas Curry emphasized the role played by the OCC's newly established Office of Innovation and stated that national bank charters for Fintech companies would serve the public interest, enhance the U.S. banking system, and provide a medium to openly vet risks associated with Fintech companies through clear processes, criteria, and standards.

During a question-and-answer session following the announcement, Comptroller Curry identified capital management, sound risk management, cybersecurity, data recovery, and the treatment of personally identifiable information as key factors to be analyzed in assessing a Fintech charter application. Moreover, financial inclusiveness was a theme throughout the discussion. Comptroller Curry indicated that the OCC would use its approval letter and the articles of association to bind Fintech companies to ensuring OCC core values and the provision of services to underserved communities.

The charter process for Fintech companies, especially early applicants, will not be easy. However, for online lenders that can obtain a Fintech bank charter and that would otherwise be confronted by a multitude of state lending restrictions, the OCC proposal may have substantial appeal. An OCC-chartered Fintech "bank" would have the ability to export a uniform interest rate nationwide from the state where it is located, possibly accept federally insured deposits (which should significantly reduce its cost of funds), avoid state licensing requirements, examinations, and other exercises of "visitorial authority," and disregard state laws that materially impair the exercise of their powers under federal law. This preemption of state law could well extend to usury limits that might apply to loan purchasers if the Madden decision were to be applied in an expansive manner. On the downside, such banks would be subject to more intense regulatory scrutiny, potentially steep capital requirements, and the need to comply with OCC "core values." They would not have the benefit of compliance expertise and assistance from existing banks familiar with regulatory expectations.

The OCC is seeking comment on the public policy benefits and risks of approving a bank charter for Fintech companies; how the OCC should set capital and liquidity requirements for Fintech bank charters; how charter applicants should demonstrate their "commitment to financial inclusion;" and whether the OCC should use its chartering authority to close "gaps" in the protections afforded small business borrowers, as well as to what extent financial inclusion, including adherence to OCC "core values" and the provision of services to underserved communities, should play a role in the chartering process.

On January 24, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr will conduct a webinar on these developments. A link to register is available here.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products and programs, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

Ballard Spahr's Marketplace Lending Task Force is nationally recognized for counseling marketplace lending businesses in both the consumer and small business spaces. We offer soup-to-nuts guidance, working with startup alternative lenders, long-established market leaders, banks, institutional investors, and others. We document and advise on the structure and strategy of bank, platform, and investor relationships, assist in concluding account servicing arrangements, provide extensive consumer regulatory advice, documentation and diligence assistance, and help with state licensing. We are already advising clients on the OCC's proposal, the comment process, and the steps involved in chartering a national bank.

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